U.S. Stock Market Correction Not Made In China – Ep.104

• What a week for global stock markets, but in particular, the U.S. stock market, which had its worst week in 4 years
• The Dow Jones down better than 1,000 points – over 10% from its peak puts it in official correction territory
• One-third of the stocks in the S&P 500 are already down 20% from their highs
• The Dow lost more than half of the 1,000 points today – 530 points, which is the 9th biggest point decline ever
• This is on top of the 350 points dropped on Thursday
• Thursday we broke below some key technical levels so Friday’s drop was inevitable
• There could be a bigger one looming for Monday
• This is reminiscent of the weekend before Black Monday back in 1987
• We are only about 300 points above the lows from October last year when St. Louis Fed President James Bullard saved the market and sent the Dow up 2,000 points
• This time he is throwing the market an anchor
• He still indicates the Fed is undecided
• What data over the next couple of weeks could be that significant?
• The Fed does not want to admit that they can’t raise rates
• When is the Fed going to blink?
• Valuations are extremely high, and the Fed is about to go from supporting the market to leaning against it
• The economy is decelerating
• I think the market is going to surrender all the gains it has made since March of 2009
• None of those gains have been real – they did not come from increased production or a genuine increase in corporate earnings, it was all Fed engineering
• The market has gained no ground since QE was suspended
• If the market goes down on Monday, what is the Fed going to do?
• The Fed needs an excuse not to raise rates
• The drop is not because of China
• The problem in China and in the emerging markets is caused by the perception that U.S. Fed is going to raise rates
• The markets want to blame the market correction on China but that is not why our market had a correction
• Emerging market currencies are taking the brunt of the selling by those who are expecting a Fed rate hike
• The euro is very strong today, and the dollar index is declining
• The euro is going to go on a big move, especially if the Fed caves
• Gold is up $80 in the last 2 weeks
• What happened to the theory that gold will collapse below 1000?
• Two weeks ago hedge funds were for the first time net short gold
• How is that trade working out for them now?
• A lot of people are trapped short the euro and short gold
• Now pro-dollar bets are pressing smaller currencies
• This is the last throes of the dollar bull, based on the rate hikes that aren’t going to happen
• At the end of the 6 or 7 year journey, there can’t be a rate hike
• If the Fed actually raises rates, they lose credibility because they will have to immediately reverse course
• If they do not raise rates, they can say caution is needed because of another dip in the recession
• This way they don’t have to admit that the policy was a failure
• The only economic data that came out today was the August Manufacturing PMI number – expected to improve over last month
• It dropped again to 52.9 – the lowest level since October 2013, and the biggest miss in 2 years
• If the Fed is truly data dependent it would have already admitted that it can’t raise rates
• At the end of 2014, I predicted that 2015 would be a much weaker economy than forecasted
• I was right about that
• I thought by now the Fed would have admitted that the economy is too weak for a rate hike
• But the Fed just keeps talking about a potential rate hike as though it were a real possibility
• This is a very dangerous game
• The Fed is going to have to eventually go to QE4, but in the long term, the market actually needs tight money, but that is going to lead to a much bigger financial crisis than the one we had in 2008
• Bank failures, defaults – not only on private debt but also treasuries
• That would ultimately be better than the massive inflation we will suffer
• The Fed will not have the luxury of holding bonds to maturity if it needs to fight inflation
• Many bonds the Fed is holding do not mature for 20-30 years
• What if the Fed has to shrink its balance sheet?
• The Federal Reserve is going to go further and further into bankruptcy
• How then can we be the issuer of reserve currency?
• This is the box that the Fed is in – it needs low interest rates so it can pretend that it is solvent
• The stock market is finally coming back down to earth
• Corporations have been buying back shares at high prices – if they have spent all their cash on buybacks, how are they going to maintain profitability?
• The entire purpose of QE was the “Wealth Effect”
• If the Fed wants to keep the air in this bubble it’s going to have to blow pretty hard
• It has to take the rate hikes off the table and put QE back on the table
• There’s a lot of risk for Monday – this would be a very bad time to deal with a stock market crash
• The Fed is going to have to admit that they can’t raise rates, and that will be a huge game changer

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